Increased government borrowing from domestic commercial banks is making it difficult for the private sector to get credit, two parliamentary reports have found.
The reports, released recently, were written by the parliamentary committee on national economy chaired by former minister Syda Bbumba.
The reports, one on the state of indebtedness, grants and guarantees, and the other on the performance of the economy during the financial year 2016/17, note that government borrowing from the banking sector is adversely affecting growth and distribution of the much-needed credit to the private sector.
It adds that as at June 30, 2017 commercial banks held the largest portfolio of government securities at 41.95 percent of the total stock of Shs 5.744 trillion.
From the interviews the committee had with various private sector players, ministry of finance, Bank of Uganda and other officials, it was discovered that one of the top six largest banks in the country in terms of portfolio, lends mainly to government.
"The contribution of such a bank and other banks that lend to government to the growth and development of the Uganda economy remains in doubt," the report notes.
The report further notes that domestic debt stock relative to private sector credit declined by 1.9 percent from June 2016 to June 2017, although it exceeded the public debt management framework threshold. This decline, the report notes, was due to a rise in private sector credit by 10 percent in 2016/2017 financial year owing to the reduction in nonperforming loans.
"However, exceeding the threshold implies that government domestic debt is constraining funding to the private sector. If this persists, the private sector will be outcompeted by government for credit from financial system," the report warns.
It advises government to adhere to the domestic borrowing limit of 10 percent to domestic revenues as provided for in the Public Finance Management Act, 2015.
The committee also notes that the current banking institutions in Uganda cannot meet the financial service needs for majority of people engaged in the productive sectors, especially agriculture.
Even microfinance institutions are not helping people because credit from these institutions is more expensive than credit from commercial banks.
The committee advises government to support the emergence of financial institutions that serve the needs of the people who are engaged in productive sectors.
"Uganda Microfinance Support Centre and Post Bank Uganda Ltd should be restructured with a view to making credit affordable to people that engage in the productive sectors," the committee recommends.
Middle-income status impossible
At the beginning of his current term in 2016, President Museveni assured the country that by 2020, Uganda will have attained middle-income status of $1,036 per capita.
However, according to figures provided by the ministry of finance, BoU and Uganda Bureau of Statics, during the 2016/17 financial year, the per capita income was recorded at only $681 which is $355 (34%) lower than the middle-income status target.
